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84 MODULE 21 PROFESSIONAL RESPONSIBILITIES

22. (d) According to the Statements on Standards for 3. Identifying tasks'for taking action on
Consulting Services, independence is not required for per- planning de-
formance of consulting services unless the CPA also per- cisions.
forms attest services for that client. However, the CF-'A must
Other engagements may also include, but generally are not
remain objective in performing the consulting services.
Furthermore, the understanding with the client for perform- required to perform, the following:
ing the services can be established either in writing or orally.
I. Assisting client to take action on
23. (d) CS 100 indicates that the nature and scope of planning deci-
consulting services is determined solely by the practitioner sions
and the client, typically in which the practitioner develops
findings, conclusions, and recommendations for the client. 2. Monitoring client' s progress in achieving
All three services listed would fall under the definition of goals
consulting services. 3. Updating recommendations and helping
client re-
24. (c) The AICPA Statement on Standards for Consult- vise planning decisions. .
ing Services, Section 100, describes general standards for all B.I. Common Law Liability to Clients
consulting services, in addition to those established under
the AICP A Code of Professional Conduct. Section 100 ad- 26. (d) A CPA is not automatically liable for failurp to
dresses the areas 'of client interest, understanding with the discover a materially overstated account. The CPA can be
client, and communication with the client. Specifically, this liable ifthe failure to discover was due to the CPA's own
section states that the accountant should inform the client of negligence. Although performing an audit in accordance
significant reservations concerning the scope or benefits of with GAAS does not guarantee that there is no negligence, it
the engagement. is normally a good defense against negligence. Answer (a)
is incon:ect because there was privity of contract with Cable.
25. (a) Personal financial planning engagements are There was an oral agreement constituting a contractual rela-
only those that involve developing strategies and making tionship, therefore this would not be a good defense. An-
recommendations to assist a client in defining a~d achieving swer (b) is incorrect because an oral contract for an audit is
personal financial goals. Personal financial engagements still enforceable without a signed engagement letter. An-
involve an of the following: swer (c) is incorrect because a CPA does not have to per-
form an audit recklessly or with an intent to deceive to be
1. Defining engagement objectives liable for negligence. Negligence simply means that a CPA
2. Planning specific procedures appropriate to failed to exercise due care owed of the average reasonable
en- accountant in performing an audit.
gagement
3. Developing basis for recommendations 27. (c) In order to meet the required standard of due
4. Communicating recommendations to client care in conducting an audit of a client's financial statements,
a dinarily prudent CP A under
C the circumstances. Answer (a) is incorrect because the cli-
P ent's expectations do not guide the standard of due care.
A Rather, the standard of due care is guided by state and fed-
h eral statute, court decisions, the contract with the client,
a GAAS and GAAP, and customs of the profession. An-
s swer (b) is incorrect because it is generally the client's re-
t sponsibility to prepare its financial statements in accordance
h with generally accepted accounting principles. Answer (d)
e is incorrect because a CP A is not normally liable for failure
d to detect fraud or irregularities unless (1) a "normal" audit
u would have detected it, (2) the accountant by agreement has
t undertaken greater responsibility, or (3) the wording of the
y audit report indicates greater responsibility.
t
o 28. (c) The following elements are needed to establish
p fraud against an accountant: (1) misrepresentation of the
e accountant's expert opinion, (2) scienter shown by either the
rf
o . accountant's knowledge of falsity or reckless disregard of
the truth, (3) reasonable reliance by injured party, and
r
m (4) actual damages. Answer (a) is incorrect because con-
tributory negligence of a third party is not a defense avail-
w able for the accountant in cases of fraud. Answers (b)
it and (d) are incorrect because privity of contract is not a re-
h quirement for an accountant to be held liable for fraud.
t 29. (a) In the performance of an audit, a CPA has the
h duty to exercise the level of care, skill, and judgment ex-
e pected of a reasonably prudent CP A under the circum-·
s stances. Answer (b) is incorrect because a CP A performing
a an audit must adhere to generally accepted ~uditing stan-
m dards. It is the client's responsibility to prepare its financial
e statements in accordance with generally accepted accounting
d principles. Answer (c) is incorrect because an accountant is
e not liable for failure to detect fraud unless (1) a "normal"
g audit would have detected it, (2) the accountant by agree-
r ment has undertaken greater responsibility such as a defal-
e cation audit, or (3) the wording of the audit report indicates
e greater responsibility for detecting fraud. Answer (d) is
o
f . incorrect because a CP A can be liable for negligence, which
s is simply a failure to exercise due care in perfohning an
k audit. The CP A does not have to be grossly negligent or
i intentionally disregard generally ~ccepted auditing standards
n to be held liable for negligence.

a
n 30. (c) A CPA will be liable for negligence when s/he
d (ails to exercise due care. The standard for due care is
j guided by state and federal statutes, court decisions, con-
u tracts with clients, conformity with GAAS and GAAP, and,
d the customs of the profession. Per the AICP A Professional
g Standards, AU 325, requires that if the auditor becomes
m aware of weaknesses in the design or operation of the inter-
e nal control structure, these weaknesses, termed reportable
n conditions, be communicated to the audit committee of the
t client. Answer (a) is incorrect because a CPA is not.nor-
e many liable for failure to detect fraud. Answer (b) is incor-
x rect because including a negligence disclaimer in an en-
p gagement letter has no bearing on whether the CP A is
e negligent. Answer (d) is incorrect because generally a CPA
ct is not required to inform a client's customers of
e embezzlements although knowledge of the embezzlements
d may adversely affect the CPA's audit opinion.
o 31. (d) A CPA's duty of due care is guided by the fol-
f lowing standards: (1) state and federal statutes, (2) court
a
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